Investing in Real Estate for appreciation and rental purposes
January 14, 2013 1:04 PM Subscribe
What is the most prudent way to go about choosing, managing, and strategizing my "future" real estate empire?
I am considering investing in real estate at some point in my life very soon. I have just read some various books including Rich Dad's guide to Real Estate which recommends investing in a property once you have 20% to put down and then goes through the process of legal issues, etc that you will face.
I was just wondering if anyone had any experience and/or good references for me to further learn about real estate investing? I am coming from a stock market background so anywhere where I could find good real estate research and charts on prices in a given area or other related data (such as average prices for contracting) would be appreciated. Also somewhere that would be me a good "typical income statement/balance sheet" for real estate investors so I could get an idea of typical expenses in this business.
Right now I am in the early stages but look forward to learning a lot and covering many different angles. I am thinking of getting into a small single family home at first and then possibly branching out into apartments or commercial real estate.
I am considering investing in real estate at some point in my life very soon. I have just read some various books including Rich Dad's guide to Real Estate which recommends investing in a property once you have 20% to put down and then goes through the process of legal issues, etc that you will face.
I was just wondering if anyone had any experience and/or good references for me to further learn about real estate investing? I am coming from a stock market background so anywhere where I could find good real estate research and charts on prices in a given area or other related data (such as average prices for contracting) would be appreciated. Also somewhere that would be me a good "typical income statement/balance sheet" for real estate investors so I could get an idea of typical expenses in this business.
Right now I am in the early stages but look forward to learning a lot and covering many different angles. I am thinking of getting into a small single family home at first and then possibly branching out into apartments or commercial real estate.
What Griphus said.
Were I you, I'd buy a duplex, live on one side, rent out the other. Being sure that you could afford to float the whole mortage without a rentor.
Be a homeowner yourself, learn how to deal with the things that can go wrong in a home.
Donald Trump has gone bankrupt so many times it would be a joke, except you can't get that asshole to shut up!
I can't recommend against real estate as an investment enough.
The people who make money aren't afraid to be slumlords, buying crappy property to rent for section 8 housing.
Dave Ramsey says, "no house that's been owned outright has ever been foreclosed on."
posted by Ruthless Bunny at 1:13 PM on January 14, 2013 [2 favorites]
Were I you, I'd buy a duplex, live on one side, rent out the other. Being sure that you could afford to float the whole mortage without a rentor.
Be a homeowner yourself, learn how to deal with the things that can go wrong in a home.
Donald Trump has gone bankrupt so many times it would be a joke, except you can't get that asshole to shut up!
I can't recommend against real estate as an investment enough.
The people who make money aren't afraid to be slumlords, buying crappy property to rent for section 8 housing.
Dave Ramsey says, "no house that's been owned outright has ever been foreclosed on."
posted by Ruthless Bunny at 1:13 PM on January 14, 2013 [2 favorites]
If you want to invest in real estate to make money, buy into a REIT.
posted by misskaz at 1:14 PM on January 14, 2013 [6 favorites]
posted by misskaz at 1:14 PM on January 14, 2013 [6 favorites]
I have a house. I plan to rent it out, but it did not start out that way. I'm in the process of having a potential tenant sign a lease, so take my response as that of someone with very little experience...
Most houses come with deferred maintenance, so to save money, you either live in it yourself while all the things are getting fixed up, or you're good at handyman things and fix everything yourself quickly. Trying to hire contractors to fix things in a timely manner (say, three months)... you'll pull your hair out. (There's a reason "general contractors" make money--because they organize things for you.)
Your alternative is to hire a property manager/management company. That way, at least you can go on vacation without worrying about something bad happening to your house. (e.g. If the stove breaks, you are supposed to replace it within 72 hours or something, depending on where the property is.)
If you must get into real estate, the more units the safer you are (relatively). (1) You only have one water heater/roof/siding to replace no matter how many units are in the one building. (2) Your property is less likely to ever be completely vacant.
I think that real estates can be a fun investment for the right person. You have to have a cash cushion and/or extra income to float yourself through the vacancies. You either hire a property manager or do everything yourself (and become very hands on).
posted by ethidda at 1:23 PM on January 14, 2013 [1 favorite]
Most houses come with deferred maintenance, so to save money, you either live in it yourself while all the things are getting fixed up, or you're good at handyman things and fix everything yourself quickly. Trying to hire contractors to fix things in a timely manner (say, three months)... you'll pull your hair out. (There's a reason "general contractors" make money--because they organize things for you.)
Your alternative is to hire a property manager/management company. That way, at least you can go on vacation without worrying about something bad happening to your house. (e.g. If the stove breaks, you are supposed to replace it within 72 hours or something, depending on where the property is.)
If you must get into real estate, the more units the safer you are (relatively). (1) You only have one water heater/roof/siding to replace no matter how many units are in the one building. (2) Your property is less likely to ever be completely vacant.
I think that real estates can be a fun investment for the right person. You have to have a cash cushion and/or extra income to float yourself through the vacancies. You either hire a property manager or do everything yourself (and become very hands on).
posted by ethidda at 1:23 PM on January 14, 2013 [1 favorite]
Around here its super easy, you can buy any old shack and rent it out for an exorbitant price. If you allow pets you can tack on a 20% premium. We have universities, military bases, limited housing stock and a very large and transient young professional class. You can rent a $120,000 condo for $900/month easy. Because people do not want to buy, they want to rent.
So I'd suggest picking a really good location first of all. Any idiot can make money in rentals here if they have the down payment.
posted by fshgrl at 1:27 PM on January 14, 2013
So I'd suggest picking a really good location first of all. Any idiot can make money in rentals here if they have the down payment.
posted by fshgrl at 1:27 PM on January 14, 2013
What is the most prudent way to go about choosing, managing, and strategizing my "future" real estate empire?
Understand one thing above all others: if you are renting out property, you aren't "investing" in real estate, you're taking on a second job, namely that of "landlord." That's right, being a landlord isn't something you do as an investor. It's something you do as a job, i.e., a way of employing your labor, not necessarily your capital.
If all you want to do is to employ your capital, and you think that real estate is a good way of doing that, invest in an REIT.
posted by valkyryn at 1:35 PM on January 14, 2013 [1 favorite]
Understand one thing above all others: if you are renting out property, you aren't "investing" in real estate, you're taking on a second job, namely that of "landlord." That's right, being a landlord isn't something you do as an investor. It's something you do as a job, i.e., a way of employing your labor, not necessarily your capital.
If all you want to do is to employ your capital, and you think that real estate is a good way of doing that, invest in an REIT.
posted by valkyryn at 1:35 PM on January 14, 2013 [1 favorite]
The only benefit to investing in real estate is access to leverage, other wise returns are less than inflation.
posted by JPD at 1:50 PM on January 14, 2013
posted by JPD at 1:50 PM on January 14, 2013
You can rent a $120,000 condo for $900/month easy.
This is not necessarily a good investment. For example, with 20% or $24000 down.
Mortgage and interest (@ 4%): $460/month
Property tax (@1% property value): $1200/year = $100/month
Insurance: $240/year = $20/month
Maintenance cost (rule of thumb: 1% of house value a year, but honestly, only if you're lucky): $1200/year = $100/month
Total cost: $680/month if you do everything yourself. I'd allot a few days to a few weeks for placing a tenant. And then another half hour to four hours a month for fixing things and collecting rent and doing all the paperwork.
Rent = $900/month BUT you have to allow 1 month vacancy a year (on average, some people are more conservative, some are less).
So your annual cash flow is 11*900-12*680 = $1740.
If you had invested in stocks that give 6% return, you'd have made $1440, with far less work. My financial advisor is still quoting 8-10% return rate on stocks. So that's $1920 to $2400.
Your alternatives are to hire a property manager (who typically charges 8-10% of monthly fee PLUS a bonus of 1/2 to 1 month's rent for tenant placement). So then you'd make 11*900-11*.08*900-450-12*680 = $498. That's basically negligible.
Some people like to factor in equity gains (which as we've seen from the bubble, is not something that's really dependable). In the first year, you'd gain $1690 in equity. But it's not liquid, and you can only get it by either selling the house (which does not fit your scenario) or borrowing against it.
posted by ethidda at 1:59 PM on January 14, 2013 [6 favorites]
This is not necessarily a good investment. For example, with 20% or $24000 down.
Mortgage and interest (@ 4%): $460/month
Property tax (@1% property value): $1200/year = $100/month
Insurance: $240/year = $20/month
Maintenance cost (rule of thumb: 1% of house value a year, but honestly, only if you're lucky): $1200/year = $100/month
Total cost: $680/month if you do everything yourself. I'd allot a few days to a few weeks for placing a tenant. And then another half hour to four hours a month for fixing things and collecting rent and doing all the paperwork.
Rent = $900/month BUT you have to allow 1 month vacancy a year (on average, some people are more conservative, some are less).
So your annual cash flow is 11*900-12*680 = $1740.
If you had invested in stocks that give 6% return, you'd have made $1440, with far less work. My financial advisor is still quoting 8-10% return rate on stocks. So that's $1920 to $2400.
Your alternatives are to hire a property manager (who typically charges 8-10% of monthly fee PLUS a bonus of 1/2 to 1 month's rent for tenant placement). So then you'd make 11*900-11*.08*900-450-12*680 = $498. That's basically negligible.
Some people like to factor in equity gains (which as we've seen from the bubble, is not something that's really dependable). In the first year, you'd gain $1690 in equity. But it's not liquid, and you can only get it by either selling the house (which does not fit your scenario) or borrowing against it.
posted by ethidda at 1:59 PM on January 14, 2013 [6 favorites]
You're a college student, right? Buy a duplex or triplex in the area around the college and rent to students. Be prepared to fix a lot of stuff. Start with one building. See how you like being responsible for all of the things that can and will go wrong. Yes, you can pay other people to take care of them, but you won't make much money that way. Unless the college is planning on building a lot of of new apartment-style dorms you'll always have tenants. After you've had the first one a couple of years, buy another similar house.
posted by mareli at 2:01 PM on January 14, 2013
posted by mareli at 2:01 PM on January 14, 2013
If you had invested in stocks that give 6% return, you'd have made $1440, with far less work.
Ah, but there's one advantage that real estate has that stocks don't: depreciation and passive losses, which can be applied against other income. Indeed, real estate can be a terrific companion investment if you have a lot of capital gains, even if you hire people to do the work for you. This is why real estate is a secondary investment for a lot of business owners.
While I can't run the OP's tax numbers, the losses could well erase all his taxable income and thus save $1K to $5K annually, in addition to cash flow and equity.
Now, I won't dispute that it's hard work. It definitely is that -- right down to being called away from a party at 1am to deal with a plumbing disaster or a "small" kitchen fire. There are legal expenses that can add up when dealing with unwanted tenants. And so on and so forth. This is not for the faint of heart. Do not believe this is a path to immediate riches.
But the tax scenario should definitely be examined.
One of the books that I like is the New No-Nonsense Landlord. And an absolute essential -- try to at least skim it cover to cover before you need to look up anything in it -- is Nolo Press Every Landlord's Legal Guide. In general, look for books that are about "landlording" rather than "investing in real estate" -- there's a world of difference in terms of goals and mindset.
Typical expenses can and likely will include:
* Window blind replacement (I find even "good" tenants can wreck up to 40% of them)
* Carpet cleaning (basically mandatory between tenants) and carpet replacement (every 2-3 tenancies)
* Broken/leaking appliances/fixtures -- refrigerators with condensers that conk out, toilets that leak all over the floor, faucets that seem to need a fresh valve, garbage disposers that clog or leak, water heaters that silt up and cost a fortune or rust out and destroy drywall all the way down the building, ceiling fans that aren't secured to code and yank out half the ceiling when they wobble out, deck balusters that sneak away in the middle of the night, never to return.
* Painting. Every move-out. Done right, which means slowly and carefully.
* HVAC. In a rental, these last about 2/3 as long as in a single-family, because they get used hard. Renters, for some reason, love to heat the place up to 80 degrees year round, stuff like that. Even if they're paying for the energy, you're paying for the equipment.
* Roofs. Deck stairs. Double-glazed windows. Screens get abused and need frequent replacement.
* Disasters. Tree falls. Cars backing up as tenants move out, flattening a neighbor's shrub and ripping a bunch of vinyl siding away. The barbeque on the deck, in the porch, or inside the three-season porch trick. Have good insurance, and avoid making unnecessary claims, because nowadays they'll drop you just for inquiring about a situation.
* The clogged drains. Oh, lord ha' mercy, the clogged drains. Learn how to handle these with plungers, snakes, and elbow grease (chemicals not recommended), or pay plumbers a premium to look at their ass crack.
So, this is doable, many people do it. But it's not easy money and you have to be sure you're up to the combination of work and (in the beginning modest) financial reward that it offers.
posted by dhartung at 3:04 PM on January 14, 2013 [3 favorites]
Ah, but there's one advantage that real estate has that stocks don't: depreciation and passive losses, which can be applied against other income. Indeed, real estate can be a terrific companion investment if you have a lot of capital gains, even if you hire people to do the work for you. This is why real estate is a secondary investment for a lot of business owners.
While I can't run the OP's tax numbers, the losses could well erase all his taxable income and thus save $1K to $5K annually, in addition to cash flow and equity.
Now, I won't dispute that it's hard work. It definitely is that -- right down to being called away from a party at 1am to deal with a plumbing disaster or a "small" kitchen fire. There are legal expenses that can add up when dealing with unwanted tenants. And so on and so forth. This is not for the faint of heart. Do not believe this is a path to immediate riches.
But the tax scenario should definitely be examined.
One of the books that I like is the New No-Nonsense Landlord. And an absolute essential -- try to at least skim it cover to cover before you need to look up anything in it -- is Nolo Press Every Landlord's Legal Guide. In general, look for books that are about "landlording" rather than "investing in real estate" -- there's a world of difference in terms of goals and mindset.
Typical expenses can and likely will include:
* Window blind replacement (I find even "good" tenants can wreck up to 40% of them)
* Carpet cleaning (basically mandatory between tenants) and carpet replacement (every 2-3 tenancies)
* Broken/leaking appliances/fixtures -- refrigerators with condensers that conk out, toilets that leak all over the floor, faucets that seem to need a fresh valve, garbage disposers that clog or leak, water heaters that silt up and cost a fortune or rust out and destroy drywall all the way down the building, ceiling fans that aren't secured to code and yank out half the ceiling when they wobble out, deck balusters that sneak away in the middle of the night, never to return.
* Painting. Every move-out. Done right, which means slowly and carefully.
* HVAC. In a rental, these last about 2/3 as long as in a single-family, because they get used hard. Renters, for some reason, love to heat the place up to 80 degrees year round, stuff like that. Even if they're paying for the energy, you're paying for the equipment.
* Roofs. Deck stairs. Double-glazed windows. Screens get abused and need frequent replacement.
* Disasters. Tree falls. Cars backing up as tenants move out, flattening a neighbor's shrub and ripping a bunch of vinyl siding away. The barbeque on the deck, in the porch, or inside the three-season porch trick. Have good insurance, and avoid making unnecessary claims, because nowadays they'll drop you just for inquiring about a situation.
* The clogged drains. Oh, lord ha' mercy, the clogged drains. Learn how to handle these with plungers, snakes, and elbow grease (chemicals not recommended), or pay plumbers a premium to look at their ass crack.
So, this is doable, many people do it. But it's not easy money and you have to be sure you're up to the combination of work and (in the beginning modest) financial reward that it offers.
posted by dhartung at 3:04 PM on January 14, 2013 [3 favorites]
If you want to be a real estate investor, buy an old house, live in it, and rent out rooms (or a basement) for a year or two. Once you're used to repairs and dealing with renters, buy another property and rent that out. Don't jump in, or it will eat you alive. I know several people who lost big time, even after doing everything right.
posted by blue_beetle at 3:31 PM on January 14, 2013
posted by blue_beetle at 3:31 PM on January 14, 2013
If you potentially want to own and manage rental properties, I would recommend "Landlording" by Leigh Robinson. I have the 8th edition...I see it is now up to the 11th edition. It is probably available in most public libraries.
posted by 99percentfake at 7:11 PM on January 14, 2013
posted by 99percentfake at 7:11 PM on January 14, 2013
Get a job working for a property management company. Then you'll learn about dealing with tenants, what common repairs are, how evictions are handled in your area and stuff like that. Then you're learning without risking your money, in fact you get paid to learn. That is what I did.
posted by Melsky at 8:09 AM on January 15, 2013
posted by Melsky at 8:09 AM on January 15, 2013
This thread is closed to new comments.
Holy shit those Robert Kiyosaki bucks are scam city. Hell, he just filed for bankruptcy himself and while there's a lot around the concept of "bankruptcy," I certainly wouldn't be taking financial advice from the dude. Also, his money came from selling copies of books with vague ideas about how to sell real estate in a market that no longer exists, never mind actually practicing what he preaches. Stay away from that shit like the plague or you're liable to lose your shirt.
posted by griphus at 1:07 PM on January 14, 2013 [9 favorites]